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What's wrong with this picture? If the stock market is closing in on record levels, the economy ought to be smoking. Then why is the Federal Reserve acting as if we're still in a recession or worse?

That question is posed by Wells Capital Management's uber-bullish chief investment officer, Jim Paulsen. He's been pooh-poohing the fretting of the bears since the market lifted off nearly four years ago. His view was deftly detailed most recently in Barron's by my buddy, Jon Laing, last month ("More Molehill Than Menace?" Dec. 1).

To be sure, Jon for years has been taking to task those with a more saturnine market view, once accusing them of being warped by faulty toilet training. Leaving such fraudulent Freudian notions aside, it has to be admitted Paulsen's P&L bests those of most bears. (Jim also is a much more pleasant chap than most of the cranky sorts who keep predicting the sky inevitably will fall, if not tomorrow then someday.)

The Federal Open Market Committee Wednesday reaffirmed its policy of QE-forever -- that is, continued quantitative easing, consisting of purchases of $85 billion per month of Treasury and agency mortgage-backed securities, plus pinning the overnight federal funds rate to near zero -- until the unemployment rate gets down to 6.5%, down from 7.8% in December. Even so, the stock market wasn't enthused, as the Dow Jones Industrial Average slipped 44 points, to 13,910, and further from the 14,000 mark.

But while Paulsen doesn't question whether the Fed should remain accommodative, he wonders if the unconventional, pedal-to-the-metal policies still are called for.

"U.S. household net worth has been almost entirely restored; the household debt-service burden has fallen back close to record lows; job creation has recently been persistent; the unemployment rate is declining while the labor force grows; banks are no longer hanging by a thread and weekly bank loans have been trending steadily higher; foreclosures have slowed markedly; housing activity and home prices are finally rising, consumer confidence is near a five-year high; a massive municipal debt failure is no longer anticipated; corporate profits are at an all-time high and the U.S. stock market is nearing a new record. Where's the crisis?"

Indeed, "most everything has moved on from the crisis except for the Fed," Paulsen writes in a note to clients. "Today, while challenges still exist, the economic reality is far better than it was in 2008 or 2009 when the crisis first began and yet monetary policy is more unconventional and more aggressive than ever."

But, it might be argued that the disparity between the real economy and the Dow's seemingly inevitable march to 14,000 and beyond its record close of 14,164.53 on Oct. 9, 2007 -- at least according to the on-screen "bug" on bubblevision -- can largely be explained by the Fed's monetary policy.

Money for nothing, and lots of it, provides the wherewithal to bid up asset prices -- for those who can take advantage of it. For everybody else, it means higher costs for necessities but not income gains; in other words, a lower standard of living.

As Ed Hyman, the head honcho at International Strategy & Investment, the Wilshire 5000 -- the broadest measure of the U.S. stock market -- has rallied during the various phases of the Fed's quantitative easing -- QE1, QE2 and Operation Twist (the purchase of long-term securities, offset by sales of shorter-dated notes.) So, it would be expected stocks should continue to rise as the current expansionary Fed policy persists.

Of course, not all of that has passed through to the real economy. Gross domestic product contracted at a 0.1% annual rate in the fourth quarter, according to the government's first stab at the data, which was released Wednesday. That weaker-than-expected showing was quickly explained away by pundits as the result of inventory destocking and a sharp curtailment in military spending.

Only conspiracy theorists would question why the economy had a head of steam, with a 3.1% annualized real growth rate in the third quarter, ahead of the November elections, only to stall shortly thereafter. To be sure, Superstorm Sandy hurt the quarter's performance, as did the sharpest cutback in defense spending since the withdrawal from the Vietnam War in the early 1970s. Still, real final sales -- GDP less inventory swings -- decelerated sharply, to a 1.1% annualized growth rate, from 2.4% in preceding quarter.

Leaving aside the trivial, quarter-to-quarter blips in economic indicators, it's apparent that the Fed's money printing has failed to trickle down to the broad economy. The turnover of the money supply -- its "velocity" -- has fallen, offsetting the increase in the money stock.

As writes Leigh Skene of Lombard Street Research in London:

"In America, for example, the drop in money velocity to almost one-third under the lowest recorded prior to 2012 in this monetary series wiped out 5/8ths of the increase in M2 [the broad money measure, consisting of currency, checking and most savings accounts, including money-market funds] in the past five years.

"Most of the remaining M2 growth created inflation. Worse, excess debt growth increasingly levered asset prices up, creating the biggest asset bubble ever, which widened income disparities. The real incomes of the minority that benefited from microscopic interest rates rose and those of the majority fell. Rising debt burdens and falling real incomes for most people reduced real output growth in the 2000s decade to the second lowest in the 22 decades from 1790, according to Hoisington Investment Management. The 1930s was the lowest decade and the 2010s' average won't be higher than third-lowest."

So, to come back to Paulsen's point, why does the Fed have its policy throttles on "full speed ahead" if all is well? Or does it only appear so because of the monetary inflation produced by the central bank?